Attention Required For Companies Buying Business Interruption Insurance

While fire can take a matter of minutes to destroy a building, claiming for the losses can take years if care is not taken when purchasing insurance. A simple mistake on the insurance declaration form or unclear projections on future profits can make claiming for business interruption a complex and lengthy procedure.

A sour result for the “Sugar Hut” Club

It is over five years since the Brentwood “Sugar Hut” Club was forced to close for 49 weeks between 13 September 2009 and 25 August 2010, but the High Court has only recently ruled on how much of the business interruption loss was recoverable from the insurer.

The case of Sugar Hut Group and others v AJ Insurance Brokers Ltd [2014] was complicated because the Sugar Hut Group failed to fully disclose certain business details in the original proposal form. The underwriters with whom the insurance was placed then refused to indemnify the loss, claiming material non-disclosure and breach of warranty. AJ Insurance, which was aware of the undisclosed information the time the insurance was taken out, later agreed to pay 65% of the business interruption loss after they were sued by Sugar Hut Group. The litigation focused on what amounted to the business interruption loss and how it should be calculated.

Predicting future profits

It is difficult to predict future profits, as Mr Norcross, the owner of the Sugar Hut Group, found out. Mr Justice Eder felt that it was not possible to use the post-fire profits received for the club to estimate the loss as the club had undergone a substantial makeover along with the repairs and was now a newer and larger club. Moreover, the “TOWIE effect” of publicity for the club from television series “The Only Way Is Essex” was not something that was considered in the business forecast at the time of the fire, and its success could not have been anticipated.

Assertions from Mr Norcross that the “TOWIE effect” had actually had an adverse effect on the business model, due to the lower spending newer clientele, were rejected by Mr Justice Eder. This shows the court’s reluctance to allow a strong recovery post-fire to be considered as indicative of the likely performance of the business in the period of interruption.

Further, the percentage interest figure that the insurers would have to pay the Sugar Hut Group for the delay in payment would not be the figure that the specific club had to pay on loans that they owed to other businesses. It was a general estimate based on what was “generally payable” by a club of the same type and size when considering the “general nature of its business operations.”

Implications for businesses and insurance brokers

As good practice, it is advisable for representatives of businesses to scrutinise insurance policies and ensure that they make sure they disclose all material information whenever starting or renewing insurance policies. They should be aware that any material non-disclosure or breach of warranty will remove the insurer from liability under the policy and recovering a loss will then become problematic, as five years of negotiations and litigation has proven for Sugar Hut Group.

Brokers need to ensure that clients are properly advised regarding disclosures and warranties in insurance policies and that they are made aware of the consequences of breaches. Clients should also be informed about the requirements that will arise in the event of a claim for business interruption insurance.

For specialist advice about making or defending insurance-related claims contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.